Avison Young releases its Spring 2018 North America and Europe Industrial Market Report

Toronto, ON — Sound fundamentals, the logistics requirements of e-commerce, and innovations in building design and utilization continue to drive the rapid evolution of the industrial property sector across North America and Europe. An undersupply of available space remains a central issue in most markets, and developers have responded with notable new construction to anticipate occupiers’ growing needs. Major online players are altering the supply chain, and new technologies and innovations are determining how, where and what type of industrial product is being built. Meanwhile, the needs of big data and the cannabis industry (in some markets) are adding to an already crowded playing field. Unknown factors potentially impacting the sector – and the global economy in general – include geopolitical changes such as the renegotiation of NAFTA and the U.K.’s exit from the European Union.

These are some of the key trends noted in Avison Young’s Spring 2018 North America and
Europe Industrial Market Report, released today.

“Today, I am pleased to share with you Avison Young’s insights into the robust industrial market – the commercial real estate sector’s hottest asset class,” comments Mark E. Rose, Chair and CEO of Avison Young. “These insights are drawn from our annual industrial survey, spanning 59 markets across five countries and two continents, with a combined industrial stock of more than 14 billion square feet (bsf).”

He continues: “The push to find cost-effective solutions for same-day or next-day delivery to consumers is continuously challenging the retail sector – and, by association, the industrial sector, which frankly are becoming more intermingled than ever before. Although e-commerce sales make up only a small, but rapidly growing, fraction of overall retail sales, stakeholders looking to service the retail sector are thinking long-term. Strong demand is reflected in declining vacancy rates which, by the way, are at or approaching historic lows in many markets and countries, leading to rising rental rates for industrial space. This situation has increased asset values – a fact that has made industrial assets hot commodities among investors and users as well as occupiers.”

“Confidence in the long-term viability of the industrial sector and e-commerce has recently been demonstrated not only by the sheer leasing velocity and demand for space, but also by some notable M&A activity, such as the all-cash transaction valued at C$3.8 billion, including debt, between Blackstone and PIRET earlier this year in Canada, as well as a recently announced merger agreement in which Prologis will acquire DCT and its 71 million square feet (msf) of real estate in a US$8.4-billion stock transaction, including the assumption of debt, in the U.S.,” says Rose.

According to the report, of the 59 industrial markets surveyed by Avison Young across North America and Europe, vacancy declined in 38 markets, remained unchanged in three, and increased in 18 during the 12-month period ending March 31, 2018. The analysis also revealed that, with demand in most markets outpacing new supply, the development of new product has escalated. Nearly 235 msf was completed across all markets surveyed by Avison Young in the 12 months ending with the first quarter of 2018 – an increase of more than 5 msf compared with the prior 12-month period. Meanwhile, the amount of space under construction increased more sharply, jumping more than 13 msf year-over-year to nearly 234 msf.

Market conditions in the U.S. were again landlord-favourable during the 12-month period ending March 31, 2018. The 12-bsf U.S. industrial market ended the first quarter with an impressive 5% vacancy rate overall, a decrease of 30 bps year-over-year, even while a significant amount of new construction was delivered. E-commerce and last-mile distribution hubs near population centres, data centres and bio-tech facilities continue to be prevailing demand generators and have had a meaningful impact on industrial vacancy.

“Developers are seeking to meet strong tenant demand by creating the most efficient product possible through innovation and technology,” states Earl Webb, Avison Young’s President, U.S. Operations. “Land constraints have supported innovative construction, such as multi-story development, and technology solutions in supply and distribution logistics. E-commerce and consumer demand for ever-shorter delivery windows as well as ever-growing data-centre requirements have strained industrial markets in the country’s population centres.”

“The industrial sector continues to be a darling asset class in the capital markets,” adds Erik
Foster, Avison Young Principal and Practice Leader of the firm’s industrial capital markets group. “Because of the solid leasing fundamentals, low vacancies and a lack of available institutional quality product in most major markets, capital spending in the development space is one of the primary means for investors to gain equitable returns given the certainty of lease-up.”

Webb concludes: “The U.S. market has experienced a healthy tightening over the last several years, though it must be noted that the rate of improvement has slowed as the overall average reached low single digits. Supply-chain logistics, technology and the availability of affordable power – in the form of electricity or other energy sources – will be key contributors to the long-term health of the industrial sector.”